The Impact of Hedge Funds on Asset Markets
66 Pages Posted: 25 Sep 2014
There are 2 versions of this paper
The Impact of Hedge Funds on Asset Markets
Date Written: September 2014
Abstract
This paper provides empirical evidence of the impact of hedge funds on asset markets. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model based on liquidity provision by hedge funds to noise traders to rationalize our findings, and empirically verify auxiliary predictions of the model.
Keywords: bonds, currencies, equities, hedge funds, liquidity, return predictability
JEL Classification: G11, G12, G14, G23
Suggested Citation: Suggested Citation